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Factors Affecting on Capital Investment Decisions of Fast Food Industry

Research & Finance

Factors Affecting on Capital Investment
Decisions of Fast Food Industry

Madiha Rasheed
MBA 14224
Submitted to
Prof. Umar Masood

Superior University. Lahore

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

Introduction
The food intake of the people of each country is linked to a number of factors, such as
consumers' income, employment status, education level and cultural differences (Dowler 2001).
Due to global change lifestyle of people change gradually spend more money on fast food and
not spending on higher education, computers, books, magazines, newspapers, videos and
recorded music (Schlosser 1998). Fast foods have been defined by Bender and Bender
(1995) as "Fast food is a broad term used to lend themselves to a limited menu of food
production technologies, vendors tend to burgers, pizza, chicken, sandwiches and specialty
products such as" .the book in the Lundberg definition of fast food is "fast food service already
prepared and held in the food, table service means no menu items appear" (Lundberg, 1984).
The sheer size of the fast-food company ensures that it has a significant impact on the eating
habits of large parts of the population (Fieldhouse 1996). Segmentation of retail clients should
focus on the company as the target customers in specific geographic locations, to plan
strategically when it comes to influence the differentiation in selected segments of the country
and the people capability, political decisions (Kwate 2008). One study examined the effects of
the fast food restaurant neighboring access almost the healthy individual. Has taken place in the
United States study had any evidence of the link between the fast-food retail and access to
financial instruments, there is little (Burdette and Whitaker 2004; Jeffery et al. 2006; Morland
et al. 2002). Profitable food, beverage management and planning, the fast food defined in term of
fast-food restaurant. Fast food restaurants are low price, fast service and convenient places to eat
(Sweeney, Green, & Drake 1980). Other definitions of the fast food restaurant is the "a
standard that provides a limited food menu, food preparation, service, equipment, management
systems, and eating facilities utilize labor-saving technology." (Haas, & Robins 1981). The word
"restaurant" was first us in America by the Jean Baptistie in 1794. He was a French refugee; he
came to America and opened his first restaurant. Later on it was Lorenzo who served the food
industry for more than 50 years (Lundberg 1984). After starting in 1970, the fast food industry is
beginning to interest people in great speed and acceleration, a large chain of the food industry
has been in existence, such as McDonald's, Burger King, burgers and pizza chain (Lattin 1985).
The restaurant was about 970,000 in 2012, $ 632 billion expected sales in the US (National
Restaurant Association 2012). Restaurant industry in 2012 to about 12.9 million employees, is
one of the largest private employers in the United States (National As the foundation of the US
economy, the restaurant industry is suffering during the recent economic downturn (CBS News,
2009). Consumer confidence reported by the deterioration of the housing market decline after
The causal relationship was simple; As a result, consumers will start cutting back on
discretionary spending by eating out (Barbard & Uchitelle 2008 Sales and profits of the
restaurant industry for the first time began to push the end of 2007, the same decline in sales and
profits ranging from bankruptcy and closure of the restaurant chains like Bennigan's and 2008's
more than 600 Starbucks locations (CBS News 2009).

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

Literature Review
Literature on market entry decisions are largely economic, political, and shows that are affected
by social conditions (Whitelock & Jobber 2004). The growth rate of the fast food industry is
directly proportional to employment and consumer interests. The fast-food consumption and
expenditure patterns reflect better the lives of people, depending on the economy (Dean, 1987).
According to Dean, these factors affect the growth and better understanding of these elements
can be left-to-date in time, and fast-food industry is to increase the revenue manager .A positive
correlation between a few of the restaurant was found between consumers with different types of
income and customer base. Higher income consumers visit a restaurant more often as compared
to low-income consumers.
Gain mass (weight), especially women (Jeffery & French 1998) found that fast food is in
proportion to negatively affect people's social habits. It is supposed that both the technical and
the leg islative parties should sit together and find some solution to the problems that are being
faced in the environment to improve the quality of the fast food so that the technical issues may
be made the part of the policy (Tester, Stephanie A. Stevens et al. 2010). Hazard Analysis and
Critical Control Points (HACCP) is the speed and the industry's safety implementation, in
particular to improve the quality of the food in the fast food industry found a very good
technique (Sweet, Balakrishnan et al. 2010). The use of the technology has increased the budget
for the Burger King fast food, such as the increase in the growth of the industry and the metaphor
of the TV ads for McDonald's, as a result, led to the sale to increase (Harris, Schwartz et al.
2010). Poultry meat, the purpose of the PRP for the meat quality to be introduced in order to
effectively manage the supply requirements and insurance, the very key, and the main problem in
the fast food industry (the one of the key ingredients used in the fast food industry) (Manning &
Chadd 2006).
The restaurant Industry can be divided into two parts; fast food and full service. Typical family
restaurants and buffets can be counted as full service restaurants, on the other hand the fast food
restaurants include many type of restaurants which sell sandwiches, pizzas, chicken grills,
hamburgers and etc. As there is high competition in the fast food industry the profit margins are
low, therefore most positions in this industry ar e paid the minimum wage or close to it
(Reynolds 2002). Most of fast food industry employees are part-time workers and they are
generally young people belonging to age group 16-24 (Reynolds, 2002). But in recent years
these teenagers are not interested in working in the fast food industry as much before. This
caused a problem for the fast food industry, because as teenagers are not potential employees
anymore the fast food employees became high in demand and this situation is resulted in higher
wages and lower profit margins. In order to overcome this problem fast food companies started
to hire more retirees and immigrants. By this way retirees and immigrants had a chance to earn
some extra money for their families. Most of the positions, (except management and corporate

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

positions) do not require a high education or a special ability so retirees and immigrants are able
to fill the positions easily. Fast foods are final products which are ready to serve directly
to people. This kind of foods is very famous especially among young people. Of course these
products create a market and it is referred as fast food market.
This is about immediate consumption of foods which serve to people who are customers of fast
food sector and if evaluation of market potential is done, amount of it can be understood. Global
market value will be useful for our project because globalization has affected on fast food
market. So there is a question about what globalization is. Actually it has different definitions
because it changes according to theoretical notion of interdisciplinary studies. For that reason
while definition of it was made, we paid attention to tell according to economical approach. So
Globalization is common usage of factors of productions (land, labor, capital) which can be
moved in the world economy, common usage of all market in the world which has some
regulation especially in World Trade Organization or interstate regulations in order to use
whole market, common usage or better usage of technology in the world (Labont & Schrecker
2007). We know famous brands in fast food sector on the other hand there are lots of local fast
food restaurant which are located in many countries. Especially well -known brands are Burger
King, McDonalds, KFC, and Pizza Hut etc.
They are very big fast food companies and they have high potential about integration to world
market. So these kinds of famous brands can be seen in the world. Of course they apply
different procedures and process from country to country. But as a conclusion, they have a
huge growth rate thanks to globalization (Labont & Schrecker 2007). This is starting point
of ethical issues. Because, even if there are lots of bad sides of fast foods and fast food
restaurants they have a huge growth rate. If we investiga te recent studies about revenues and
growth rate of this sector, we will reach following results. Revenues of fast food sector as a
global evaluation were $ 158.7 billion in 2008 and if we look at compound annual growth rate,
we can see it was 6.6% between 2004 and 2008. Of course there is a prediction till 2013.
Investigators think that revenues will reach $200 billion in 2013 (Denominator 2009).
Even if fast food is harmful for health because of causing obesity, people continue to consume it.
When maki ng an evaluation about reasons of consuming fast food, firstly we can meet price of
fast food because it is very cheap to be ought. Menu types are very special and interesting. In
other words they are attractive especially for children and teenagers. On the other hand
demographics and type of lifestyle is important (Jeffery, Baxter, McGuire & Linde 2006). For
example income level is important because most of the time people who have from middle to
high income level can buy this kind of products. Students who dont leave with their parents
because of education prefer to buy fast food in order to reduce eating time. So demand increases
for fast food and indirectly it causes some disease which comes from obesity (Jeffery, Baxter,
McGuire & Linde 2006).

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

The restaurant industry was already suffered from the recent recession, the ever-rising gas price
definitely made it more challenging. According to Stensson (2012), the increase in gas price had
negatively effect on restaurant operations either on sales or operation side. In general, restaurants
has a relatively large proportion of customers on the lower end of income scale, the rising gas
price means less disposable income that could be spent in discretionary areas like restaurants
(Stensson 2012). The corresponding impact was lower sales. On operational sides, operators says
due to fuel surcharges, supplier prices are higher, in average, their sales were off 5% due to the
elevated level of gas and energy prices (Stensson 2012).
According to the National Bureau of Economic Research (NBER), the United States experienced
an economic recession from December 2007 through June 2009 (The National Bureau of
Economic Research 2010). It is believed that the recession was the worst one since the Great
Depression in terms of its duration and impact (Sum, Khatiwada, McLaughlin & Palma 2009). In
the first 18 months of the recession, gross domestic product (GDP) shrank by about 5.1%
(Bureau of Economic Analysis, 2011). 10.6 million people became unemployed and the
unemployment rate reached 6.9% in the fourth quarter of 2008 (Borbely,2009). In the autumn of
2008, months of trouble in housing, credit and financial markets resulted in a stunning decline in
stocks (Shinkle 2008). The Dow Jones Industrial Average tumbled by nearly 2,400 points,
including a sharp 18% decline on a single week in late September of 2008 (Shinkle 2008).
During the This Week interview by George Stephanopoulos (2009), President Obama
summarized the recession as whether its retail sales, manufacturing, all of the indicators show
that we are in the worst recession since the Great Depression.
Recent history shows that recession depresses stock price (Lim 2008). According to Gitman,
Joehnk & Smart, the intrinsic value of stocks is the present value of the future cash flow of
expected earnings discounted by a risk adjusted rate of return (2010). During the economic
recessions, the intrinsic value of stocks reduces since the ability of corporations to generate
future earnings diminished (Franz 2010). Stock prices, measured by stock index such as Standard
& Poor 500 Stock Index or Dow Jones Industrial Average, experienced a reduction during 2008
due to the concern that the earnings of corporations were going to reduce because of the
recession (Mulligan 2009). In 2008, the S&P 500 experienced its worst year since 1937 with
38.49% reduction in its value (Solin 2011). The percentage loss in the Dow industrial and
Nasdaq Composite Index in 2008 is 33.84% (worst since 1937) and40.54% (worst in history),
respectively (Gaffen 2009). The slumps of stock prices due to recession further reduced business
profit, which forced firms to slow production and lay off employees.
According to Harvey (1989), reduction in earnings is the most common consequence for most
equities during the recession since the decease of the companies stock prices. The recent
recession had forced many corporations to cut or suspend payments to shareholders as profits
dropped. Howard Silverblatt, the senior index analyst at S&P, said that overall, dividend cuts
cost investors $58 billion in 2009 (Norris 2010). In the first quarter of 2009, 64% of dividend

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

announcements were negative (Norris 2010). Decreased dividends lowered shareholders

confidence in the profitability of the companies; they chose to sell their shares, this further
lowered the stock price and depressed the stock market as a whole. Analysts at Ned Davis
Research describe the steep declines in early October of 2008 resemble the "type of waterfall
decline that occurs at the end of bear markets when fear feeds on itself" (Shinkle 2008). In
addition, stock volatility increases during recessions (Schwert 1990). During the recent
recession, investment risk increased while returns decreased with higher market volatility,
therefore many investors were withdrew their investments on stock market and migrated to less
risky financial products, such as bonds. As the investment in stock market declined, the overall
stock market value declined.
The restaurant industry is vulnerable to economic downturns (Gu,1993). For example, eating and
drinking places, the principal portion of the restaurant industry, which provides about three
fourths of the total employment opportunities in the restaurant industry, posted 17,600 job losses
in November 2008, which was the fifth consecutive month of job losses in the industry (National
Restaurant Association, 2008). According to the statistics released by Bureau of Labor Statistics,
prior to the recession, eating and drinking places had not posted job losses for five consecutive
months since 1958 (National Restaurant Association 2008).The restaurant industry has low profit
margins ranges between 2% and 6%, compared to 20.4% of the most profitable industry such as
network and other communications equipment industry (Skidelsky 2009; Anonymous, 2009).
Rising food, commodity and gas prices and increases in minimum wages placed increasing
pressure on menu prices and profit margins (Trowbridge 2011). In addition, as the food and labor
costs rose rapidly, the recent economic recession also created major cash-flow problems for these
restaurateurs who have problems with get enough credit lines to cover investment and operating
costs (Caplan 2008).
Under these circumstances, some high profile restaurants filed for bankruptcy in 2008, such as
Bennigan's, Steak and Ale, and Metromedia Steakhouse, Buffets Holdings Inc., VICORP
Restaurants Inc., and Black Angus Steakhouse (Sheel 2008). In addition, the decrease of market
demand made the environment more challenging for the restaurant industry. (Korkki 2008)
found that during the recession, in order to prevent personal financial ruin, people simply choose
not to dine out to reduce expenses. According to 2008 annual report on eating patterns in
America, 72% of all meals were homemade, the average American had a meal at a restaurant 79
times, a history new low (The NDP Group, 2009). In 2008, the $550 billion U.S. restaurant
industry suffered from the sluggish sales for the first time in nearly two decades (Caplan 2008).
According to Warren Solochek, the vice president of NPD Group, the industry had lost 2 billion
visits due to the recent recession (Ruggless 2010).
As the unemployment rate had soared and consumers curtailed spending, the National Restaurant
Associations performance index shows that the industry had been shrinking for 23 months in a
row ending November of 2009 (Newman 2009). In November of 2008, the Dow Jones U.S.

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

Restaurant & Bars Index, which includes 12 leading restaurant firms, slipped about 12%
(Rosenberg, 2009). The recent recession adversely affected the stocks of restaurant industry. In
February of 2009, the stock price of the top 26 restaurant companies lost an average 49.3% of
their value from their highest points over the past 52 weeks (Krantz 2009). Some individual
restaurants and their investors even suffered more Ruths Hospitality (RUTH), which runs the
Ruths Chris Steak Houses; DineEquity (DIN), operator of International House of Pancakes
(IHOP) and Applebees; and Ruby Tuesday (RT) have all seen their stock fall nearly 90%
(Krantz 2009).
Even though all types of restaurants share the common characteristics such as require a large
amount of labor to produce products and services, seasonal fluctuation in sales, different
restaurant segments tend to perform differently through the recession since they have different
styles of operation, target customers and financial characteristics (Gu 1996). For example, full
service restaurants generally rely on high profit margin, the sales of full service restaurant are
mainly from customers discretionary expenditure, when recession comes, customer sentiment
and household income are lower, full service restaurants are the first to feel the effects (Youn &
Gu 2010). Fast food restaurants, on the other hand, rely on the large sale volume to compensate
the low profit margin; their sales are primarily from consumers necessity expenditure therefore
they have more steady revenues (Youn & Gu 2010). As another example, the second highest cost
in restaurant industry-labor costs, are 24.2% and 29.8% of sales for limited service restaurants
and full service restaurants, respectively (Nelson 2001). The 5.5% difference represents more
routine activities are executed in the limited service restaurant industry (Nelson 2001). Consider
the laborintensive nature, full service restaurants are more vulnerable to change in labor and
benefit costs. These differences may have eventually resulted in the different performances of
full service and limited service restaurants during the recession. For instance, limited service
restaurants may fare better than full service restaurants due to their lower menu price and labor
costs.
In finance literature, commonly discussed capital structure determinants include as- sets
structure, business risk, growth, size, profitability, and managerial control (Weston & Brigham,
1990). (Myers 1984) suggests that profitable firms should have less cumulative need for external
financing and that profitable firms in slow-growth industries should have low debt ratios. Titman
and (Wessels 1988) propose that large diversified firms tend to use more debt and profitable
firms tend to use less debt. (Scott 1972) concludes that industry, as a proxy of business risk,
should have an influence on the capital structure. Business risk affects a firm's tolerance of
financial risk and hence its financing policy. The effect of managerial control on capital
structure is more complicated. According to (Weston and Brigham 1990), when the management
has voting control, it may choose to use more debt to avoid diluting the control. Its financing
preference, however, may switch to new equity when the firm is financially weak and is facing
default risk. Empirically Scott and (Martin 1975) found that capital structure differed across in-

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

dustries and those large firms used more debt than small firms. In (Gupta's 1969) regres- sion
analysis, growth companies were found to have higher debt to assets ratios. In a cross-nation
regression analysis, Toy Stonehill, Remmers, Wright, and (Beekhuisen 1974) found that growth
was positively related to debt ratio and that profitability had a nega- tive impact on corporate
debt use. The multivariate regression analysis by Titman and (Wessels 1988) found that
profitability led to lower debt leverage, but the impact of growth on debt use was insighcant.
(Friend and Lang 1988) found that debt ratios of publicly held firms increased with the fraction
of stocks owned by managerial insiders.
Previous empirical studies on capital structure have focused on large firms in manufacturing
industries. Few empirical studies on capital structure have been docu- mented in hospitality
research. (Kwansa, Johnson, and Olsen 1987) found no significant relationship between sample
hotels' debt /equity ratios and all the explanatory variables including growth, profitability, and
size in their across-firm model. On the other hand, (Sheel 1994) regression model, which used
samples of hotel firms and manufacturing firms, all independent variables, including size,
profitability, and operating risk, were significantly related to the debt to assets ratio. In a
comparative study on financial ratios of different types of restaurant firms, (Gu and McCool
1993) found sighcant dif- ferences in debt ratios across different types of restaurant firms. Their
study however, did not investigate the factors that had caused the difference. An investigation of
the causes of the financing diversity in the restaurant industry4 nonmanufacturing industry
mainly composed of small firms-will not only enhance a weak link in hospitality research but
also enrich the empirical literature on capital structure in general.

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

Conclusion
The purpose of this study is to help practitioners and investors to understand factors affecting on
fast food industry differently by examining their stock indices performance, and provide helpful
suggestions and tips to help them to cope with a similar market downturn. it is core for restaurant
operators and investors to strategically plan ahead to survive another challenge. Many fast food
restaurants are also expanding the variety of their menus. A study by the National Restaurant
Association estimated that more than 75percent of fast food restaurants introduced new menu
items in 2000, while 66 percent intended to add new food items in 2001. At McDonald's
restaurants, for example, Big Macs are now sold alongside newer products like breakfast bagels,
salads, fruit and yogurt parfaits, and soft-serve ice cream with candy mix-ins.
The fast food industry has experienced continuous growth over the previous 3 years and is
forecast to continue to grow by approximately 4% each year. This is good news for any
perspective. Fast food Industry establishment provides a franchisee with not only full training
programs and continued support but also with strong brand recognition.

Consumers still want value for their money, healthier options and to know that the company they
are buying from are environmentally responsible and are taking actions to decrease their negative
impact on the environment.
The post liberalization period facilitated competitive advantage for many sectors and fast-food
sector was one of them. The accumulation in the GDP undoubtedly helped to increase the per
capita income and eventually, the customer spending. Fast food emerged in the countries in the
beginning of last decade when number of domestic retailers from organized and unorganized
market began to offer the food other than the traditional and customary food. The food was
originally related to the local tradition and also to the overseas counterparts. However, there were
very little scope for the retailers to grow in the market since the sales was largely isolated. People
from the middle class during that time would neglect to dine out and preferred to have home
cooked food. Consequently, the open market improved the standard of living of the consumers
and they began to raise their knowledge towards the changes in the society and environment.
Moreover, the GDP grew and so did the consumer spending in the market. The availability of
fast food stores soon became popular in the markets and thereafter, the market entry of
international fast food retailers such as McDonald's, KFC, Pizza Hut and Dominos increased the
competition as well as awareness in the market. As the size of market grew, the consumer
behavior gradually turned to adopt the fast food in the daily life of the consumers. Later, it was
found that people turned more to the stores that eventually the stores to set their critical success
factors in order to differentiate them from others.

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

Estimation of the first order condition (Euler equation) using a consistent rational expectation
assumption showed that the dynamic structure explains the investment process in food
processing industries well. In particular, the lagged variable of the FDI position had high
explanatory power. The other variables that represented demand forces (such as real wages and
sales) were highly significant as well. This indicates that US food processors are driven by
demand in a host country and labor cost considerations. The model included several macro
variables, representing the state of host countries' economies, that served as proxies for
investment barriers. They were: FDI openness (measured as a percentage of overall FDI in host
countries' GDP), exchange rates, real GDP, and general tax levels. Taxes and FDI openness were
statistically significant, while real GDP and exchange rates were not. The explanatory power of
the first two macro variables suggests that they indeed have influence on the timing of foreign
investment in food processing.
Estimations results revealed a relatively high speed of adjustment of FDI, indicating that US
food multinationals are quite flexible in terms of adjusting their production capacities. This can
happen because multinationals buy existing production facilities instead of setting up their own,
which can take more time and be more expensive. In this study quantified the effects of
temporary and permanent shocks to exogenous variables on the FDI position. Such shocks can
be a result of introducing preferential trade agreements that may affect the factors influencing
FDI decisions and facilitate movements of capital between countries. Higher wages and interest
rates would decrease the FDI position of US multinationals, while an increase in demand for
output would improve it. FDI openness and the exchange rate were found to have a positive
effect on investments. Real GDP and tax levels were estimated to have effects on food
processing investment that were counterintuitive. However, a lack of statistical significance in
case of the real GDP variable and an inability to reflect specific taxes on FDI in the case of the
general tax level variable can explain these results. The FDI position of US multinationals in the
fast food industry has increased substantially over the last two decades. The main objectives of
the FDI have been: 1) to reduce production costs by using cheap labor in foreign countries, and
2) to effectively penetrate foreign markets. This study indicates that fast food industry would
increase substantially if Western Hemisphere countries reach an agreement on an FTAA. In
addition, there will be more inter-industry trade between the United States and Latin American
countries, based on the principle of comparative advantage, mainly because of differences in
resource endowments between the United States and these countries. However, US trade with
Canada would be more intra-industry trade, rather than inter-industry trade, because of
similarities in their resource endowments.

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Factors Affecting on Capital Investment Decisions of Fast Food Industry

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